Some Women Who Sell LuLaRoe Leggings Allege The Company Was A Pyramid Scheme11:03

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Amy Jo Reece in her basement in Culpepper, Va., with her unsold inventory. (Damon Casarez for Bloomberg Businessweek)

The clothing brand LuLaRoe has many fans of its patterned leggings and geometrically designed dresses, which are sold by women out of their homes. But thousands of these "consultants," as the company calls them, have left LuLaRoe. Several filed lawsuits last fall alleging the company was a pyramid scheme.

She says in the early days of the company, these consultants were making thousands of dollars a month. But as more people signed on to sell the clothes — almost 150,000 in 50 states — there was too much competition.

“No matter how popular these clothes are, you're still going to have a limited number of people who are actually able and willing to buy these leggings,” Suddath says. “Even though they're selling on Facebook to all over the country, essentially women started getting stuck with clothes that they couldn't sell.”

Interview Highlights

On how a pyramid structure might become a pyramid scheme

“So most of these companies, it costs maybe $100, $200 to buy into this and get your first package of inventory of whatever it is.

“Mary Kay is about $100 [to buy in]. LuLaRoe is unusual in that the prices have changed over the years, but on average, women have spent about $7,000, sometimes upwards to $10,000, to buy in, and that's just the initial inventory package.

“So essentially the difference between a legitimate MLM [multi-level marketing] company and something that is possibly a pyramid scheme is, what is the intention of the company? If your intention is to sell a product, and you just use this hierarchical structure to do it, that's fine, but you have to base it on sales. So if I convince you to also buy leggings and I'm getting a commission, I need to make sure that you're actually selling those leggings through to another customer.”

On how quickly people signed up as consultants

"It was a combination of the people who are already part of the company realized that they could make a lot of money because of this wholesale-based compensation, but on top of that, these clothes were very popular. And so a lot of women wanted to buy them and a lot of women wanted to sell them. And so when they started doing these national tours that would essentially inspire people to come onto the company as consultants, they just really built it up as this self-empowering thing. You can stay at home and take care of your kids and make thousands of dollars a month. And they started getting women joining by the tens of thousands. At one point, they were signing up about 500 people a day, every day, for months.”

"They just really built it up as this self-empowering thing. You can stay at home and take care of your kids and make thousands of dollars a month."

Claire Suddath

On what happened to the people who started selling the clothes

“One of the women is named Roberta Blevins. She's 37. She lives outside San Diego. And for, I think, 17 years or so, she had been a hairstylist. And she was looking at this — she has two kids — as a way to sort of supplement that income that she was making. And she signed on in 2016, was making a bunch of money, and so she actually quit her hairstylist job because she was making more selling LuLaRoe. She grew a team underneath her to about 75 people, and then she started realizing as the company is ballooning, and she's not seeing what's happening behind the scenes, but she starts getting clothes that — she says she received a lot of wet and smelly leggings. She tried to return them, and she had to fight with the company for a month. And there was a lot of other stuff that happened, and then when LuLaRoe switched over to the sales-based compensation plan, all these people underneath her had left. Her bonus checks dried up, and she struggled for several months trying to figure out what to do, and eventually she quit LuLaRoe. She went back to her hairstylist job at the same salon that she was at before.”

"One woman said DeAnne told her to her face that she liked her mentors -- the women that would get up on stage at these conventions and talk about their success at the company -- to be a size small or medium."

Claire Suddath

On how the Mormon founders, Mark and DeAnne Stidham, influenced the saleswomen

“Some of the women who worked their way up — high enough in the company as mentors at the top of the pyramid who had these teams underneath them — when they would deal with the Stidhams directly, one woman in particular, she was having trouble in her marriage, and they recommended to her that she be subservient to her husband. A number of women said that they were pressured to have their husbands come on and sell LuLaRoe with them with the idea that as a family unit they would be stronger. Obviously this was only people who had direct connections with the founders. But that does seem to be something that was routinely said.”

On how the founders convinced consultants to get gastric bypass surgery

“So I talked to about four different people in this story who told me the same story, and a couple of them even said that they had gotten the surgery. But essentially DeAnne or her sister, a woman named

Lynnae, would offer to take people to Tijuana to get a gastric sleeve because in the U.S., we have fairly strict rules on who medically qualifies for gastric surgery. The rules are much more lax in Mexico.

“And this was essentially women who were a little bit overweight maybe at best. But one woman said DeAnne told her to her face that she liked her mentors — the women that would get up on stage at these conventions and talk about their success at the company — to be a size small or medium, which is especially unusual considering LuLaRoe makes clothing in all sizes. One of its selling points is that it's for mothers who maybe aren't as confident about their bodies as they had been before. And a lot of women talk to me about how they first came to know the company through their love of the clothes and how it finally made them feel good about themselves. And they could shop through this company, if they're a size that maybe most clothing stores don't carry. So it's very unusual that they would be pressuring people to get gastric surgery.”

"You should be very wary of companies that claim that you can earn full-time income for part-time work."

Claire Suddath

On how the company is doing now

“They do still have people. There are thousands of them out there who, you know, say that maybe this was just too much work for certain people, and they just couldn't cut it, and that's essentially the way things go. But they are facing about a dozen lawsuits. They had been sued for copyright infringement for allegedly taking artwork and printing it on their clothes that wasn't theirs. They had been sued for defective clothing, for clothing that was ripping after one or two wears. A lot of these cases have been settled or are still making their way through the courts, but LuLaRoe essentially got so big so quickly that the processes that had been in place — that in a normal situation a business would be able to sort of handle things properly — it's sort of like everything happened all at once. You know, when you're only a few years old and all of a sudden you have 150,000 people all over the country selling $2.3 billion worth of clothes, and you're a husband and wife team, the infrastructure that you have in place is not ideal."

On the company’s response to the controversy

"They essentially said they had growing pains, but they feel that they acted honorably and legally and all companies face problems like this.”

On how this story is a cautionary tale for businesses and women

“I think it's a cautionary tale both for businesses. If you are going to set up a direct selling company or an MLM, you need to be sure that you are following the FTC's guidelines about how and why you should set up your company a certain way. And then for women, a lot of women get into these direct selling companies because they need a way to make money and that's fine. But if you really look at the numbers, even the Direct Selling Association, the trade industry group, says the average income that people make from these types of companies is about $2,500 a year, which is, you know, maybe part of a vacation or something like that, but it's not a full-time income at all. And so you should be very wary of companies that claim that you can earn full-time income for part-time work.”